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SPECIAL REPORT

Raiders of the killer dapp

Blockchain technology may offer away to re-decentralise the internet

Startups want to remake the internet with blockchain

Jun 30th 2018

Print edition | Special report

About The Economist

Ⱦ The ultimate walled garden: China has the world’s most centralised internet system

Jun 30th 2018

Print edition | Special report

WHAT MASS IS for Catholics, technology conferences are for

geeks. Speakers at these gatherings often sound like preachers,

promising a dazzling future. So it was at a blockchain conference

in Berlin in March, organised by Blockstack, a startup. The

enthusiasm on display echoed that of gatherings in the mid-1990s.

Some speakers quoted early cyber-gurus, such as the late John

Perry Barlow, author of “Declaration of the Independence of

Cyberspace”, and Sir Tim Berners-Lee, the inventor of the original

web, now known as Web 1.0.

Such events seem to be heralding the birth of a new technology

movement. Businesses and projects with odd names are already

proliferating. They are easily confused with the many startups that

have recently launched new crypto-currencies via an initial coin

offering (ICO), a much-hyped form of crowdfunding. But though

Blockstack and its ilk have done the same, their main aim is to use

technology to make the online world a more decentralised place

where people can do business “on their own terms”, in the words

of Ryan Shea, co-founder of Blockstack. Again, this sounds like the

sort of thing geeks said in the 1990s. Will this generation succeed

where the previous one failed?

It will not be easy. To achieve their objective, they will have to

overthrow an existing digital regime, called Web 2.0, that is still

going strong. But it seems to be a feature of information

technology that every few decades its most profitable part

becomes commoditised. In the 1970s the microprocessor radically

reduced the cost of computers. In the 1990s open-source software

started to dethrone Windows, Microsoft’s then-dominant

operating system. Now it is the turn of data, predicts Joel Monegro

of Placeholder VC, a venture-capital firm set up to bet on the

trend.

You can check out, but you can never leave

Today online applications bundle user interface, code and data.

Facebook, for instance, is best known for its website and app, but

both are just the tip of a virtual iceberg: most of the software and

all the information that keep the social network going lives in the

firm’s cloud. Controlling those data gives these companies power.

Users are free to move to another service, but they would lose all

that information, including the links to their friends. By contrast,

in the new world of Web 3.0 (or Web 3, for the truly initiated),

interface, code and data are meant to be kept separate. This would

allow power to flow back to users, who could decide which

application can access their information. If they were not happy

with one social network, they could easily switch to another. With

such decentralised applications, or “dapps”, users could also

interact directly with other users without an information-

hoarding intermediary in the middle.

To be sure, similar ideas have been tried before—and failed.

Decentralised services, then called “peer-to-peer”, briefly

flourished in the late 1990s and early 2000s. They fizzled out

mainly because no one knew how to build a robust decentralised

database. That changed in 2009 with the invention of Bitcoin and

the blockchain, the technology that underlies the crypto-currency.

In essence, it is a ledger without a centralised administrator,

maintained collectively by some of its users, called “miners”, who

also protect the blockchain and keep each other in check.

Though these days Bitcoin is mostly

used to speculate, the crypto-currency

can be seen as a dapp. The blockchain is

a specialised database in the form of an

immutable record of the transaction

history of every bitcoin in circulation,

which makes it clear who owns what.

Holders of the currency use a piece of

software called a “wallet”, essentially a

browser for the blockchain that carries

the necessary cryptographic keys, to

keep track of their assets and transfer

money.

Almost all Web 3.0 projects borrow

heavily from Bitcoin and Ethereum,

another blockchain that comes with

“smart contracts”, snippets of code that

encapsulate business rules which are

executed automatically if certain events occur. The most advanced

projects focus on building the software infrastructure needed for

dapps. Blockstack, arguably the most ambitious, is best seen as an

operating system for such applications.

Another field of much endeavour is decentralised digital storage.

One such effort is Solid, a project led by Sir Tim, which features

individual “data pods” where people keep their information

(though it does not use blockchain technology). Another is the

InterPlanetary File System (IPFS), the brainchild of Juan Benet, a

co-founder of Protocol Labs, a startup.

Actual dapps are still few and far between. Graphite, which runs

on Blockstack, is a bundle of online word-processor and other

office applications, much like Google’s G-Suite. OpenBazaar,

which relies on IPFS, is an alternative to Amazon. There is no

central server to list what is on offer and to process transactions;

instead, buyers and sellers download software that can settle

things directly between them. The most popular dapp so far is a

game called CryptoKitties, a marketplace for digital pets that lives

on the Ethereum blockchain.

Building the right tools and applications will take time, but it is

not the hardest part of decentralisation. Plenty of institutional

innovation is also needed. If blockchains are to manage without

central administrators, others will have to handle the task. These

could be miners, but also developers and operators of “nodes”,

computers that keep copies of the blockchain. Web 3.0 projects are

often like mini-economies, with a currency and a governance

system. And project leaders, though often of a libertarian bent,

have no choice but to become regulators.

Previous efforts at decentralisation also foundered because the

economics proved wanting, including those of the original

internet. Historically, most protocols were developed by

researchers and then maintained by non-profit organisations. But

when the internet went mainstream and the money poured in,

things got more complex. Commercial interests made finding

consensus more difficult, and engineers preferred to join fast-

growing internet companies building applications. Besides,

incentives to adopt new protocols were lacking. So they became

the poor relation of the internet, whereas applications thrived,

explained Mr Monegro, the venture capitalist, in an influential

blog post, “Fat Protocols”, in 2016. With Web 3.0, he says, it will be

the other way round.

Again, Bitcoin pointed the way. Satoshi Nakamoto, its elusive

inventor, also designed what is now called a “crypto-economic

model”. Miners are promised a monetary reward for their number-

crunching work. Details aside, every ten minutes they participate

in a lottery. The winner gets the right to update the blockchain and

a small number of bitcoin. The reward gets paid out only after a

dozen more lottery rounds, so it is in the winner’s interest to keep

the system ticking.

Many Web 3.0 projects have developed their own crypto-economic

models. The idea is to replace a centralised firm with a

decentralised organisation, held together by incentives created by

a token—a kind of “crypto-co-operative”. All those involved,

including the users, are meant to have a personal stake in the

enterprise and get their fair share of the value created by a

protocol.

Having kittens

Some models are just intended to create a thriving marketplace,

which in the case of CryptoKitties means you can buy, sell and

breed them for monetary rewards. Other projects are more

ambitious. Filecoin, too, is meant to be a marketplace where

digital storage space will be exchanged for an eponymous digital

token. To keep it flowing, the project, also founded by Protocol

Labs, has resorted to much economic engineering. A complicated

mechanism matches supply and demand.

The most elaborate working crypto-economic model, however, is

Steemit, an online forum which rewards its 1m or so registered

users for posting contributions or rating content with real money

in the form of steem, another sort of token. One type is liquid and

can be cashed out using an exchange, which is meant to provide

near-instant gratification and attract users. The other, called

“steem power”, is less easily convertible and supposed to keep

members engaged: the more they own, the more weight their

votes have.

If this sounds complicated, the bylaws of these crypto-co-

operatives can be even more so. Once more, Bitcoin is a good place

to start, although in this case as an example of how not to do it.

When the mysterious Mr Nakamoto disappeared in late 2010, he

did not leave behind any governance mechanism to speak of. Only

a rudimentary one has been put in place since. Bitcoin developers

agree to changes to the system’s software, which miners then

implement in what amounts to a vote by computing power. But in

recent years the two groups have been at loggerheads over how

best to increase Bitcoin’s capacity. As a result, several factions

have already created their own version of the currency. Ethereum

is now running into similar problems.

To avoid such difficulties, some newer blockchain projects are

planning to hardcode their decision-making processes into the

software in the form of smart contracts, a method known as “on-

chain governance”. Tezos, for instance, calls itself a “self-

amending ledger”. It allows anyone to propose changes which are

then voted on. Winners get some tokens as a reward. Polkadot, for

its part, is planning to write a “constitution” into its “genesis

block”, the anchor for every distributed ledger. Token-holders will

be able to vote on changes to the system. But there will also be a

“constitutional court” which can override decisions.

Web 3.0 projects need to solve a number of practical problems

before they can truly take off. Bitcoin, again, helps illustrate the

hurdles. Chief among them is what crypto-buffs call “scalability”,

meaning that blockchains are currently not able to deal with large

numbers of users. Bitcoin’s capacity is higher than it was, but the

maximum is still about ten transactions per second, compared

with the thousands that a centralised payment system can handle.

Newer blockchains do better, but are unlikely ever to beat

centralised databases.

Moreover, many blockchain projects are themselves quite

centralised. Almost all bitcoin mining happens in China and is

controlled by a few firms (although the government is now trying

to constrain the energy-hungry industry). And token ownership is

often concentrated, too. Steemit, the online forum, is an extreme

example: 90% of the “steem power” tokens are held by 2% of

users, though the firm is trying to change this.

“Blockchain is a ten-year-old technology. But where are all the

applications?” asks Tim O’Reilly, who pushed peer-to-peer and

coined the term “Web 2.0” Still, he does not rule out a sudden

breakthrough that might cut the “blockchain’s Gordian knot” and

make such ledgers more scalable, for instance. Even Facebook

seems to see that as a possibility: last month it created a

blockchain unit. It is also said to be interested in taking over one

of the blockchain projects.

If such a breakthrough

were to happen, successful

dapps might come in

unfamiliar shapes. “It is

easier for new technology

paradigms to win in new

areas than to re-fight old

battles,” says Chris Dixon

of Andreessen Horowitz,

another VC firm with

investments in the field.

Remember, Google did not

win over Microsoft by developing another operating system. What

might be the search engine of Web 3.0? Mr Dixon points to

services that manage data in creative ways, for instance extracting

insights from digital information while letting consumers and

companies keep control of their data.

But what if trying to re-decentralise the internet is a fool’s errand?

That is what China’s leaders think.

This article appeared in the Special report section of the print edition under the headline

"Raiders of the killer dapp"

Special report: There is no single solution to making the internetmore decentralisedMore in this special report:

The ins and outs:

How to fix what has gone wrong with the internet

More knock-on than network:

The story of the internet is all about layers

Raiders of the killer dapp:

Blockchain technology may offer a way to re-decentralise the internet

The ultimate walled garden:

China has the world’s most centralised internet system

A new school in Chicago:

How regulators can prevent excessive concentration online

The art of the possible:

There is no single solution to making the internet more decentralised

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